20 years of Aim

For investors married (or at least invested in their marriage) to the Alternative Investment Market (Aim), the symbol is somewhat ironic. This week Aim turns 20, and if you were to ask for a symbol of its recent woes, ‘China’ would be one likely answer. In the last few years, a string of Chinese companies, including Camkids, Asian Citrus Holdings, Naibu and JQW arrived on the market promising stellar returns, before promptly losing all shareholder confidence and market value amid governance issues. For critics of Aim, the existence of such companies with seemingly limited regulatory or advisory oversight is a sign that investors have limited protections from fly-by-night listings, and that market’s current system often fails in its duty to hold companies to account.

Yet for many investors, Aim remains the most exciting corner of the equities market. For every struggling business or failed oil prospector, there is a truly disruptive growth story or major natural resources discovery success. Multibillion pound blue-chips might dominate their larger markets and benefit from limitless banking and political support, but it’s rare that a FTSE 100 constituent will double in value in a year. The same is not true of the junior market, though as its chief acknowledges in this interview to coincide with its 20th birthday, Aim remains “a stockpicker's market”.

The story so far

Above the lobby of the London Stock Exchange is a large screen, displaying a rotating graphical representation of the markets the building symbolically houses. The Aim screen looks like a sprawling, DNA-like helical structure; a web of more than a thousand PLCs, their individual place in the chain denoted by the day’s share price movement. In a room nearby, Marcus Stuttard, who since 2009 has headed the Alternative Investment Market, explains what he sees as the evolution of this creature.

“We were very clear when we set up that we wanted a broad church of sectors; if you look at other growth markets they have sometimes focused on one sector or country,” he says. “The fact that Aim has been in existence for 20 years makes it one of the few growth markets to have successfully become a real part of its national economy and financing ladder: there are now over 1100 companies in 40 different sectors, doing business in more than 100 countries.” Mr Stuttard also shrugs off the ‘junior market’ moniker, suggesting that “not that many investors make the distinction between the main market and Aim. That is a huge achievement, and one I take an awful lot of comfort in.”

Not all view Aim and the main market as one and the same. Some feel Aim’s lighter touch approach to regulation backfires too frequently, and that the nominated adviser system – where a company’s bank or broker acts as its regulator – at best provides insufficient scrutiny, or is at worst conflicted. Mr Stuttard is conscious of this reputational concern, but is confident the market’s current policing standards are up to scratch.

“There is a whole range of things we can do if nomads don’t do the due diligence on a company anywhere, be that China, the UK or North America,” he explains. “At any point, we can go in and request to go through a company’s books, and they are underpinned by the same regulatory bodies as the main market, including the Financial Conduct Authority, the Serious Fraud Office and the City of London Police. Any trends where we see there is a gap in the rules, we will identify and keep the market under constant monitor.”

But Mr Stuttard isn’t about to put the handbrake on selling Aim to the world. “There are markets like China, India and a number of African countries where there is huge economic growth and we are not in the business of stopping our involvement there,” he says. Other focuses include North American and European companies weighing up an IPO.

Another bone of contention for some retail shareholders is the risk of dilution posed by Aim companies raising money off-market from institutional investors, at a discounted share price. It is a phenomenon particularly common to the small-caps found on Aim, and indeed, one of the market’s features that the LSE sells to companies. But it is widely seen as a bear point for retail investors in the market. “It is something we are very conscious of,” the Aim chief admits. “Many companies do that because they would need to issue a prospectus as part of a wider fundraising, and Aim only sits on top of those regulations. But the prospectus directive is up for review, and we want to explore offering exemptions to more shareholders and to involve a retail component from the outset.”

Involving retail shareholders – a group that for Mr Stuttard is “massively important in terms of regular trade, liquidity and capital” – is a priority in another sense. In the next decade of Aim, the thin end of the market is likely to face some competition from rapidly expanding crowdfunding models. These platforms remain nascent, but are growing in profile and quality, and may start to nibble at the edges of the equity-seeking pool of companies Aim fishes in. For example, Business Agent, a comparison website which markets itself as the eBay of crowdfunding, is planning to set up a secondary market in the next 18 months, which would crucially get investors over the liquidity hurdle.

“It has got to be a good thing for the market, and any alternative route to equity fundraising at different stages in a company’s cycle is encouraging,” says Mr Stuttard diplomatically. What sets Aim apart from these platforms at present is an established system of rules and regulatory oversight, whatever criticism Aim’s own regulatory structure may face. “The FCA has been on the front foot with this,” comments Mr Stuttard, who does not elaborate on the "active dialogues" he has with several alternative financing platforms. “It’s not in anyone’s interest if there’s a serious failure in equity funding, and clearly the crowdfunding platforms are aware of that.”

Advice

Asked what extra advice he would impart to investors in the market he oversees, Mr Stuttard recommends prospective shareholders carry out as much research as they can. “There is a wide range of information out there on companies’ websites and in industry studies, and if there is the chance to speak directly with the companies, you cannot beat meeting management.

“Aim is a stockpicker's market but the fact that investors continue to support it even in difficult market conditions is the clearest sign of all that the buying opportunities are there,” he concludes. “We launched as a stopping point for a company on its way to the main market, but it has become an institution in its own right.”